Gallon Environment Letter – the daily edition – a policy letter from the Canadian Institute for Business and the Environment

Update on director’s liability

J.M. Madeleine Donahue, a senior partner with the law firm Norton Rose Fulbright, has published a useful paper updating the liability situation for corporate directors in Ontario. The news, at least for directors, is not good. Her paper is titled Environmental liability of directors — lingering uncertainty.

A recent case involving Northstar Aerospace has complicated the advice on directors’ liability that came out of the Bata Industries case in 1992. The Bata case established a “minimum due diligence profile” under which, to avoid personal liability, directors were expected to take steps to ensure that their company was following a reasonable level of environmental performance. Now the Northstar case has thrown that situation into some doubt.

The Northstar situation relates to a contaminated industrial site in Cambridge, Ontario. Ms. Donahue states that what differentiates Northstar is most of the directors had not been directors when events leading to the Cambridge site contamination took place or at the time Northstar began to actively monitor the site’s contamination. Many directors had resigned before the MOE issued orders requiring them to carry out the remedial work at an estimated annual cost of $1.4 million ($15 million overall). Some were not even on the Northstar Canada board. For example, one was an innocent independent director of a publicly traded parent company. According to the MOE the “fault” of the Northstar directors was failing to anticipate the insolvency or allowing the filing under the Company’s Creditors Arrangement Act without the remediation being dealt with, and neglecting to set aside any funds for a 10-year remediation program.

Norton Rose Fulbright suggests the following conclusions from the Northstar case:

The Ontario Ministry of the Environment is willing to look to current and former directors of Canadian companies and their corporate parents to fund remediation of seriously contaminated sites, particularly in insolvency and bankruptcy situations where the public interest warrants.

The MOE has argued in more than one case that director and officer liability does not require any proof of fault. It flows from the mere fact that they are, or were, directors and officers. They have the onerous burden of proving they lacked personal management or control over the assets of a corporation and if they cannot do so, they may be held liable.

Corporations need to evaluate and estimate future costs of remediation of their sites and of off-site impacted properties and arrange some form of financial assurance to ensure funds will be available to address the contamination before issues about the financial viability of the corporation arise.

According to the Environmental Review Tribunal and the Ontario Ministry of the Environment, the issue is not so much whether directors and officers maintained “management and control” to the present time, but whether the environmental risk present when they did have management and control persisted to the present time.

“Fairness factors” may take a back seat to having innocent parties remedy environmental contamination when the responsible polluters are deceased, bankrupt or wound up.

The applicability of the Northstar precedent in jurisdictions other than Ontario is difficult to assess at this stage.